While non-fungible tokens (NFTs) are taking the digital world by storm, nations are still adapting to the rapid developments in crypto technology and are facing significant challenges in legislating and clarifying the scope of these elements. With the White House issuing an Executive Order on Ensuring Responsible Development of Digital Assets in March to define what exactly a “digital asset” would encompass in the USA, a necessitated glance at Asia may provide some insight into the long journey governments and their legislative branches will have to make to fully codify and define the meaning and concept of inter alia, virtual assets and digital tokens.
A. Holistic Legislation: Japan, Singapore & Thailand
Japan: Some Asian countries have kept it simple, and used the term “crypto-assets” in legal texts, the primary example being Japan. The Payment Services Act, 2017 defines “crypto-assets” in Article 2(5) to mean-
– property value (limited to as recorded on an electronic device or any other object by electronic means, and excluding domestic and foreign currencies) which can be used in relation to unspecified persons for paying consideration for the purchase, leasing of goods or receipt of services and which can be purchased and sold to unspecified persons (counterparties) and which can be transferred by means of electronic data processing system;
– property value which can be mutually exchanged with what is set forth in the preceding item with unspecified persons acting as counterparties, transferrable by means of an electronic data processing system.
Interestingly, this choice of terminology has also been adopted by the United Kingdom and Australia. Additionally, the security tokens representing shares, bonds or fund interests in such instruments are defined in the Japanese Financial Instruments and Exchange Act and included in Article 2(24)(iii) within the meaning of “financial instruments” to mean crypto-assets as prescribed in the abovementioned Act.
Singapore: Singapore is today known as the capital of crypto, primarily because it was ahead of the game and put in place legislation regulating, taxing and codifying of digital assets and cryptocurrency. The Payment Services Act, 2019 defines “digital payment token” in Section 2(1) to mean any digital representation of value expressed as a unit, which can be transferred, stored or traded electronically and which is intended to be a medium of exchange accepted by the public as payment for goods or services or for discharge of debt.
It cannot be denominated in any currency nor pegged by its issuer to any currency. The Monetary Authority of Singapore (MAS) may prescribe other characteristics to be satisfied for a digital payment token. Additionally, the MAS has clarified that digital tokens with underlying assets may be a ‘capital market product’ for the purpose of regulation under the Securities & Futures Act.
Thailand: Akin to Singapore, Thailand too was quite early in drafting laws relating to cryptocurrency. In 2018, it enacted a Royal Decree for the purpose of governing the digital asset business. Section 3 of the Emergency Decree on Digital Asset Businesses B.E. 2561 (2018) defined “digital asset” to mean ‘cryptocurrency’ and ‘digital token’.
The same provision defined “cryptocurrency” to mean- ‘an electronic data unit created on an electronic system or network for the purpose of being used as a medium of exchange for the acquisition of goods, services or any other rights, or the exchange between digital assets, and shall include any other electronic data units as specified’.
Section 3 of the Thai Royal Decree also defined “digital token” to mean an electronic data unit created on an electronic system or network for the purpose of specifying the right of a person to participate in an investment in any business or to acquire specific goods, services or right under an agreement, including electronic data units of right as specified. Thus, even the legal definition of a “digital token” differs across countries, with Singaporean law focusing on its nature and payment feasibility and Thailand focusing on its specified purposes.
B. Codifying “virtual assets”: South Korea & Philippines
South Korea: Several States have defined these assets as “virtual”, thus bringing their digital aspect within the ambit of “virtual”. For instance, Article 2(2)(3) of the South Korean Act on Reporting and Using Specified Financial Transaction Information, 2019 defines ‘virtual assets’ as electronic certificates and all rights to it that have economic value, which can be traded or transferred electronically.
The definition excludes electronic certificates that cannot be exchanged for consideration and the place and purpose of which is restricted by the issuer. It also excludes certain stocks, prepayments, bills, transactions and intangible products prescribed under other legislations. The Financial Services Commission of South Korea has proposed amending the definition to include digital tokens with economic value, which can be digitally traded or transferred.
Philippines: In the Philippines, Circular No. 1108 was issued in 2021 to define “virtual asset” as any type of digital unit which can be digitally traded or transferred and can be used for payment or investment purposes. Digital units used for payment of goods and services solely provided by its issuer or limited set of merchants or the payment of virtual goods and services such as online gaming tokens are excluded from the meaning of virtual assets.
Virtual assets were also defined as property, proceeds, funds, funds or other assets and other corresponding value which is used as a medium of exchange or form of digital stored value created by agreement. The definition would include digital units of an exchange having centralized repository, those which are decentralized and those which may be created by computing or manufacturing effort.
C. Legal definitions for regulatory/tax purposes: Hong Kong & India
Hong Kong: In 2022, the Hong Kong Government gazetted the Amending Bill to the Anti-Money Laundering and Counter Terrorist Financing Ordinance and proposed defining “virtual asset” in Section 53ZRA(1) as a digital representation of value that-
– is expressed as unit of account or store of economic value;
– either functions as medium of exchange accepted by the public as payment for goods or services or for discharge of debt or for investment purposes or which provides rights, eligibility or access to vote on management, administration or governance of affairs in connection with cryptographically secured digital representation of value;
– can be transferred, stored or traded electronically.
The Amendment Bill has not yet been passed, but Hong Kong seems to possess the objective of rigid regulation and contingent prohibition vis-à-vis trading in digital assets.
India: India, on the other hand, seems to have warmed to cryptocurrency; after the Supreme Court struck down a Reserve Bank of India circular banning banks from issuing or trading in them, there have been several lobbies attempting to persuade New Delhi to issue official legality. Though there is no regulatory framework yet, the scope of digital assets & NFTs have been measured in India for tax purposes.
The Finance Act, 2022 inserted clause (47A) to Section 2 of the Income-tax Act, 1961, and defined “virtual digital asset” to mean any information, code, number or token (not being currency, Indian nor foreign) generated through cryptographic means and providing a digital representation of value exchanged with or without consideration with the promise of representation itself having inherent value. The digital asset could also function as a store of value or a unit of account, and be used in any financial transaction or investment, though not limited to investment scheme, and which can be transferred, stored or traded electronically.
A virtual digital asset was also defined to mean a non-fungible token or any other token of similar nature, whatever it may be called as or any other digital asset as the Central Government may notify. The Explanation specified that a “non-fungible token” means a digital asset as the Central Government by prescribe by notification.
The Central Board of Direct Taxes (CBDT) vide Notification No. 75 of 2022 dated 30th June, 2022 specified that a token which qualifies to be a virtual digital asset as non-fungible token under Section 2(47A) would not include a non-fungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable. Therefore, NFTs whose transfer results in an underlying asset such as artwork, or a fixed capital asset would not be considered “virtual digital assets”.
Moreover, the CBDT excluded several virtual digital assets as being excluded from the definition in Section 2(47A) by way of Notification No. 74 of 2022 also dated as above. The notified virtual digital assets which are excluded are gift card or vouchers (which are record that may be used to obtain goods or services or a discount on them), subscription to websites or platforms or applications, and mileage points, reward points or loyalty cards (which are record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program) usable or redeemable to obtain goods or services or a discount on them.
Concluding Comments
Circling back to the beginning, it can thus be seen that while some Asian nations have chosen to bring and define digital assets into the realm of legislation purely for taxation or prohibiting regulatory purposes, others have done so with a holistic view to legalize trading, and to have an entity oversee their functioning. Much like how NFTs prompted amendments in the definition of virtual or crypto-assets, it can be expected that other technological and blockchain amendments will lead to further evolution of legislation on the meaning and scope of digital assets.
Author Bio
